GFI Group Inc. (Nasdaq: GFIG), a leading inter-dealer broker specializing in over-the-counter derivatives products and related securities, hosted its second annual media briefing in New York City last week to discuss the outlook for credit derivatives in 2007.
John Tierney, head of US Quantitative Credit Strategy at Deutsche Bank sees general strength in US credit markets and expects defaults to remain low in 2007 as the credit environment continues to improve. One key event risk to monitor, said Mr. Tierney, was the rising number of large M&A deals and the increasing role of private equity players in these deals, which he believed would continue in 2007.
Mr. Tierney said that despite a modest decline in CDS trading volumes 2006, outstandings were growing strongly. After adjusting for double-counting, outstanding credit derivatives contracts will continue growing more rapidly than underlying cash bond markets in 2007.
"The continued use of CDS by hedge funds, mutual funds and insurance companies leads us to believe that credit derivatives will continue to gain momentum in terms of both volume and end users," said Mr. Tierney. "In addition, a number of exciting new products will fuel growth in 2007."
Donald Fewer, senior managing director, North America, for GFI Group, expanded upon these 'next generation' CDS products, naming CDSs on asset-backed securities (ABCDSs) as one of the more successful new products, that now had 30-35 single names trading daily. He discussed the success of the ABX HE index as the most liquid instrument for this rapidly growing emerging product.
"A recent development in the sub-prime lending sector put the ABX HE index on the map, as an important trading vehicle for those wishing to apply CDS to the asset-backed world," Mr. Fewer said.
He added that correlation and tranche trades were the fastest growing segments of the index-linked sector and that he believed that liquidity in this area would give rise to new index products. Mr. Fewer anticipates the development of a loan CDS (LCDS) index that would trade in the first quarter of 2007, and that products would develop for CDS on collateralized debt obligations (CDOs) the following year.
Michel Everaert, GFI's chief information officer, e-commerce, discussed the onset of electronic trading for CDS and cited 2006 as a banner year in this regard with 95% of price discovery now being fully electronic in Europe.
"The number of users on our electronic trading system CreditMatch doubled this year and we now offer more than 10,000 CDS and bonds on our system - with around 45% of all our credit derivative transactions in Europe now being fully electronic" said Mr. Everaert. Also, Mr Everaert identified straight through processing as another development seeing great progress.